This year, the parts of the market that are struggling are generally those that ran up the most in 2013: biotech, internet companies, and U.S. retailers. Conversely, some of last year’s worst performers are proving more resilient. Case in point: emerging markets.
As I write in my new weekly commentary, this trend offers a revealing snapshot into the current market environment. Let’s take a deeper look at both examples.
Retailers: This sector rose sharply in 2013 on optimism over an economic rebound, sending valuations up by roughly 30% over the past 18 months.
Today, however, U.S. consumption is not accelerating as fast as expected, despite an economy that is improving from its first quarter slump. Growth in retail sales is sluggish, rising barely 0.2% a month, roughly half the long-term average. (The exceptions are interest-rate sensitive segments like autos, which have found support in the low interest rate environment.)
As sales have struggled, so have retailers. More evidence came last week as several retailers including Dicks Sporting Goods (DKS), Staples (SPLS), and Best Buy (BBY) reported disappointing earnings or guidance.
Bottom line: Given the lethargic nature of consumer spending, and still elevated valuations on retail stocks, we would remain cautious on retailers and other consumer discretionary companies. Instead, we would favor areas of the market like large and mega-cap companies that offer better value and a potential buffer should volatility return.
Emerging markets: EM investors have recently had to contend with a growing list of geopolitical issues. In Thailand, the army chief took control of the country, declared martial law and suspended the constitution two days later. However, investors took the event in stride — perhaps because it was Thailand’s 12th military coup since 1932 — and Thailand’s stock market only posted a small loss for the week.